Running a Business
♥ Running a business:
o Sole proprietor (working by yourself)
♣ Do what you like!
♣ Not accountable to others; not liable for others’ actions (vicariously liable for employees’ actions); formalities are minimal
♣ No one to discuss business with; personal income mixed with business income – no distinction between the two; personally liable for all actions in the business
o Partnership:
♣ Partnership Act 1890 binds all partners
♣ Unlimited liability
♣ Liable for what your partners do
♣ Not suitable for large businesses
♥ Companies
+ Shareholders have limited liability – not personal for the debts of the company
+ Limited liability encourages investment in the company
+ Perpetual succession – director can leave a company, shareholder can sell shares, employees can leave: the company stays on
+ Permits growth: bigger = more shares produced
+ Easy transfer of ownership – sell shares
+ Flexible – can make the business smaller
– Series of formalities that must be observed
– Bigger the company, the higher the expenses
– Management difficulties depending on the type of company
– Problems in dispersed share ownership companies – people can pay themselves higher amounts of money
– If the company owes the bank, they can take money from small business owners
♥ Structure:
o Shareholders (general meeting)
o Directors (the board)
o Creditors
o Management
o Employees
o Stakeholders
♥ Shareholders don’t need to pay to help the company if it is in debt, they just pay for the shares
♥ Companies limited by shares are the most popular form of company
♥ Protection of shareholders encourages investment
♥ Risk is transferred from the shareholders to the creditors
♥ A ‘private’ company is any company that is not a public company
♥ A ‘public’ company is a company defined in s4 of the Companies Act
♥ Certificate of incorporation states it is a public company
♥ Requirements
♥ Differences are set out in s20
♥ Only 0.3% of companies on the register are public
♥ You can set up a public company with just one member – you don’t have to have a large company – but need two directors, one must be a natural person
♥ Company PLC
♥ Must have issued shares to the value of £50,000
♥ Private companies cannot issue shares to the public
♥ Most public companies are not listed (more rules to comply with if listed)
♥ 2.3 million companies in the register
♥ Private companies (Ltd)
♥ Less regulated than public companies
♥ Company doesn’t need to hold a general meeting
♥ 99.7% of registered companies – most are small/medium-sized (90%)
♥ Some are very large (John Lewis partnership, Boots etc.)
♥ Salomon v Salomon & Co Ltd 1897:
o Mr S is a sole trader who runs a boot business. He hears of companies. S incorporates a company and sells his business to it. The only shareholders are he, his
wife, and his children. To anyone dealing with the business, it doesn’t look like anything has changed, but legally it is not his business; it is the company’s business.The business gets into trouble and cannot pay its debts. The creditors come after Mr S, saying the company can’t pay, so he should. S loses at first instance and AC – saying the company is a mere agent and does business on his behalf; he has committed a fraud on creditors for setting this up. Lords: S is a separate legal person carrying out his own business: not liable for debts of the company.
o People connected with a company are not responsibility for the company’s debts
o Creditors can’t come after the company to pay shareholders’ debts
o Companies’ assets do not belong to anyone other than the company
♥ M&S: obligation to pay rent is M&S’s
♥ Lee v Lee’s Air Farming 1961:
o Mr L sets up a company in which he owns all shares but one, which is owned by a solicitor. He is the director and also employee of the company. While L is aerial top-dressing, the plane crashes and L dies. The company has taken out workers’ compensation insurance: if anyone dies, a claim can be made and their dependence can be compensated. The company makes a claim on the policy. Insurance company argues that it is not a valid policy because L has employed himself. Mr L has not employed himself: the company pays his wages and is a separate legal entity. Even though the only person is L, it doesn’t matter because the company is separate!
♥ Costello v MacDonald 2011:
o Mr and Mrs C own land and want to build 8 houses on the land. They approach M and he agrees to do the work. They want to make the contract through a company (they were the only owners etc.) Houses have not been properly built: C doesn’t pay. The company has no assets so M can’t sue the company. M can’t sue C because it is a separate legal entity.
♥ Lifting of the veil:
o Members/directors may be held liable for the company’s debts/responsibilities
o Remedy might be granted against the company for shareholders’ liabilities
o Difficult to find out when this may happen
o Common law: When the company is used for fraud or to avoid obligations, or when it is a sham
o Where the interpretation of a particular statute requires that liability be imposed on a shareholder
o Courts have restricted veil piercing on other grounds: Adams v Cape
o First instance: don’t have to read
o Façade/sham:
♣ Gilford Motor Co v Horne
• H was managing director who wanted to leave. G was prepared to let him leave if he signed a contract not to compete with them. Not long after he left, H did set up a company that competes. Shareholders were his wife and employee. H says the company is a separate legal entity that was competing: H is NOT competing. H was not made liable for the debts: his company was bound by the injunction because he breached his legal obligations: “Remedy might be granted against the company for shareholders’ liabilities”
♣ VTB Capital PLC v Nutritek 2012:
• Veil piercing may lead to the granting of remedies against the company which, veil piercing apart, might appear to be available only against those controlling it; and, equally, against the controllers when they might appear to be available only against the company
• VTB lends RAAP money thinking they will buy assets worth less than they should. RAAP takes over assets but they aren’t enough to pay loan. Malofeev is the mastermind behind the fraud (Russian based, out of jurisdiction), VTB tries to pierce the veil to hold Malofeev personally liable for the contract. AC made it clear that this is not what veil piercing is about.
♣ Adams v Cape 1990:
• Group of companies. C was a company based in UK. It had lots of subsidiaries, which owned NAAC in the US. C sold asbestos. NAAC’s employees contracted lung cancer and sued NAAC. NAAC pays some money and goes into liquidation, but there is more money that needs to be paid to the employees. Employees tried to sue C. C says there was no connection, as they didn’t employ them: no contract between them. Employees try piercing the veil but it won’t be pierced purely for justice. It is acceptable for C to sit in the UK and receive money but have limited liability and not be exposed to the risks.
♣ The following are not about veil piercing
♣ A parent company might be liable for others if they are agents of them (making contracts on their behalf)
♣ Chandler v Cape 2012:
• Tort law: C held liable for personal injury suffered by employees of subsidiary. C knew of risks and failed to act. C assumed responsibility for health and welfare of employees. Not about piercing the corporate veil.
♣ S 214 Insolvency Act 1986:
Directors can be liable where they knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation (liability for companies’ debts).
o Sole proprietor (working by yourself)
♣ Do what you like!
♣ Not accountable to others; not liable for others’ actions (vicariously liable for employees’ actions); formalities are minimal
♣ No one to discuss business with; personal income mixed with business income – no distinction between the two; personally liable for all actions in the business
o Partnership:
♣ Partnership Act 1890 binds all partners
♣ Unlimited liability
♣ Liable for what your partners do
♣ Not suitable for large businesses
♥ Companies
+ Shareholders have limited liability – not personal for the debts of the company
+ Limited liability encourages investment in the company
+ Perpetual succession – director can leave a company, shareholder can sell shares, employees can leave: the company stays on
+ Permits growth: bigger = more shares produced
+ Easy transfer of ownership – sell shares
+ Flexible – can make the business smaller
– Series of formalities that must be observed
– Bigger the company, the higher the expenses
– Management difficulties depending on the type of company
– Problems in dispersed share ownership companies – people can pay themselves higher amounts of money
– If the company owes the bank, they can take money from small business owners
♥ Structure:
o Shareholders (general meeting)
o Directors (the board)
o Creditors
o Management
o Employees
o Stakeholders
♥ Shareholders don’t need to pay to help the company if it is in debt, they just pay for the shares
♥ Companies limited by shares are the most popular form of company
♥ Protection of shareholders encourages investment
♥ Risk is transferred from the shareholders to the creditors
♥ A ‘private’ company is any company that is not a public company
♥ A ‘public’ company is a company defined in s4 of the Companies Act
♥ Certificate of incorporation states it is a public company
♥ Requirements
♥ Differences are set out in s20
♥ Only 0.3% of companies on the register are public
♥ You can set up a public company with just one member – you don’t have to have a large company – but need two directors, one must be a natural person
♥ Company PLC
♥ Must have issued shares to the value of £50,000
♥ Private companies cannot issue shares to the public
♥ Most public companies are not listed (more rules to comply with if listed)
♥ 2.3 million companies in the register
♥ Private companies (Ltd)
♥ Less regulated than public companies
♥ Company doesn’t need to hold a general meeting
♥ 99.7% of registered companies – most are small/medium-sized (90%)
♥ Some are very large (John Lewis partnership, Boots etc.)
♥ Salomon v Salomon & Co Ltd 1897:
o Mr S is a sole trader who runs a boot business. He hears of companies. S incorporates a company and sells his business to it. The only shareholders are he, his
wife, and his children. To anyone dealing with the business, it doesn’t look like anything has changed, but legally it is not his business; it is the company’s business.The business gets into trouble and cannot pay its debts. The creditors come after Mr S, saying the company can’t pay, so he should. S loses at first instance and AC – saying the company is a mere agent and does business on his behalf; he has committed a fraud on creditors for setting this up. Lords: S is a separate legal person carrying out his own business: not liable for debts of the company.
o People connected with a company are not responsibility for the company’s debts
o Creditors can’t come after the company to pay shareholders’ debts
o Companies’ assets do not belong to anyone other than the company
♥ M&S: obligation to pay rent is M&S’s
♥ Lee v Lee’s Air Farming 1961:
o Mr L sets up a company in which he owns all shares but one, which is owned by a solicitor. He is the director and also employee of the company. While L is aerial top-dressing, the plane crashes and L dies. The company has taken out workers’ compensation insurance: if anyone dies, a claim can be made and their dependence can be compensated. The company makes a claim on the policy. Insurance company argues that it is not a valid policy because L has employed himself. Mr L has not employed himself: the company pays his wages and is a separate legal entity. Even though the only person is L, it doesn’t matter because the company is separate!
♥ Costello v MacDonald 2011:
o Mr and Mrs C own land and want to build 8 houses on the land. They approach M and he agrees to do the work. They want to make the contract through a company (they were the only owners etc.) Houses have not been properly built: C doesn’t pay. The company has no assets so M can’t sue the company. M can’t sue C because it is a separate legal entity.
♥ Lifting of the veil:
o Members/directors may be held liable for the company’s debts/responsibilities
o Remedy might be granted against the company for shareholders’ liabilities
o Difficult to find out when this may happen
o Common law: When the company is used for fraud or to avoid obligations, or when it is a sham
o Where the interpretation of a particular statute requires that liability be imposed on a shareholder
o Courts have restricted veil piercing on other grounds: Adams v Cape
o First instance: don’t have to read
o Façade/sham:
♣ Gilford Motor Co v Horne
• H was managing director who wanted to leave. G was prepared to let him leave if he signed a contract not to compete with them. Not long after he left, H did set up a company that competes. Shareholders were his wife and employee. H says the company is a separate legal entity that was competing: H is NOT competing. H was not made liable for the debts: his company was bound by the injunction because he breached his legal obligations: “Remedy might be granted against the company for shareholders’ liabilities”
♣ VTB Capital PLC v Nutritek 2012:
• Veil piercing may lead to the granting of remedies against the company which, veil piercing apart, might appear to be available only against those controlling it; and, equally, against the controllers when they might appear to be available only against the company
• VTB lends RAAP money thinking they will buy assets worth less than they should. RAAP takes over assets but they aren’t enough to pay loan. Malofeev is the mastermind behind the fraud (Russian based, out of jurisdiction), VTB tries to pierce the veil to hold Malofeev personally liable for the contract. AC made it clear that this is not what veil piercing is about.
♣ Adams v Cape 1990:
• Group of companies. C was a company based in UK. It had lots of subsidiaries, which owned NAAC in the US. C sold asbestos. NAAC’s employees contracted lung cancer and sued NAAC. NAAC pays some money and goes into liquidation, but there is more money that needs to be paid to the employees. Employees tried to sue C. C says there was no connection, as they didn’t employ them: no contract between them. Employees try piercing the veil but it won’t be pierced purely for justice. It is acceptable for C to sit in the UK and receive money but have limited liability and not be exposed to the risks.
♣ The following are not about veil piercing
♣ A parent company might be liable for others if they are agents of them (making contracts on their behalf)
♣ Chandler v Cape 2012:
• Tort law: C held liable for personal injury suffered by employees of subsidiary. C knew of risks and failed to act. C assumed responsibility for health and welfare of employees. Not about piercing the corporate veil.
♣ S 214 Insolvency Act 1986:
Directors can be liable where they knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation (liability for companies’ debts).